The banking industry’s wish list for Budget 2007 is not too long. It wants the government to make bank deposits attractive by removing the system of deducting tax at source (the amount of tax depends on the income of the depositor) and it wants some tax sops for long-term money (deposits) that supports infrastructure funding. It also wants corporate tax paid by foreign banks to be reduced to the same level as the tax on domestic banks. And it does not expect the Budget to have anything to do with the direction of interest rates as that is the job of the central bank.
In an interview with Mint’s Gargi Banerjee, H.N. Sinor, CEO of Indian Banks’ Association, the banking industry’s apex body, outlines the banking industry’s concerns.
What do bankers want from the finance minister?
I think the Budget is more relevant to the manufacturing sector than the banking sector. So, I have a relatively small laundry list. First and foremost, we wish that all bank deposits be made more attractive for depositors by exempting the interest income from the purview of income-tax. A large section of bank depositors do not want to lock money in long-term fixed deposits. We wish the finance minister reduces the lock-in for deposits that are eligible for tax benefits, from five years to three years to put them on a par with the tax-saving schemes of mutual funds.
The other important area of focus for us is infrastructure lending by banks. Many of the commercial banks are lending to (the) infrastructure (sector) on a large scale. This calls for long-term funds. Though many of the banks are eligible for issuing bonds as per the central bank’s guidelines, they are not able to price these bonds attractively.
If tax exemptions are given to these bonds, banks will be in a position to attractinvestors.
As per the current guidelines, banks have to deduct tax at source on the interest paid to depositors if the interest payment is more than Rs5,000 in a given financial year. This leads to fragmentation of deposits by customers as they go for many small deposits instead of one big deposit to avoid the tax burden.
This increases the cost per unit (deposit) for banks. If the ceiling of interest income that attracts tax is raised from Rs5000 to Rs10,000, the transaction cost for banks will come down.
So, it’s tax and only tax... Any other issue?
One more related to tax. Currently there is some anomaly in the tax structure of foreign banks, as they are required to pay 8% more corporate tax in comparison with domestic banks. There should be a level playing field.
What about the development of corporate bond market?
We are fairly certain that the finance ministry will make some announcements in the Budget about strengthening the corporate bond market. The recommendations of the R.H. Patil committee are likely to be implemented.
Since banks are not able to support credit growth, it is extremely important that the corporate bond market is developed.
Do you think the Budget will have anything on financial inclusion?
The finance minister could announce some special schemes for farmers and the lower strata of society to ensure flow of credit to these sections of society.